Question

Assume that in a simple closed economy, income tax only influences

the economy through its impact on household consumption. Describe
and show graphically how an increase in income tax () can affect
the economy?

Answer 1

An increase in income tax can affect the economy by influencing household consumption. When income tax increases, disposable income decreases, leading to a decrease in consumption.

Step-by-step explanation:

An increase in income tax can affect the economy by influencing household consumption.

When income tax increases, disposable income decreases as households have to pay more taxes.

This decrease in disposable income leads to a decrease in consumption, as households have less money to spend on goods and services.